Pension Lifetime Allowance charge – QROPS and the Limbo Dance
For those expats with personal or occupational pensions that are getting close to the Pension Lifetime Allowance charge, there is a potential tax sting on the way. When taking benefits, this could happen-
- 55% if taken as a lump sum, or
- 25% if taken as income.
for anything over the limit at the time (one million pounds 2016/2017).
The Pension Lifetime Allowance appears very generous at first sight, doesn’t it? After all, one million pounds is a lot of money. Well, if someone is looking for a pension fund to last for 30 to 40 years after they retire, then a possible sensible income would be 3.5% per annum. So, about 35,000 per annum. While that is certainly a generous pension for many, it may not be for all.
An Analogy
Imagine a bar used for limbo dancing. Imagine a young child of a tall family. In the early years the child can easily go under the bar. As the child gets taller, it is not going to be so easy. There will be a point that is reached whereby the child cannot get under the bar any longer.
If the child can limbo under the bar and stand up and walk away, then the challenge has been met.
For those expats that have pension funds that will hit the bar (Pension Lifetime Allowance charge ), then a transfer to a QROPS ( ROPS ) may be an ideal solution. Once the pension has transferred, if it was under the bar of the Pension Lifetime Allowance charge, then the challenge has been met and the fund can grow without fear of the taxes mentioned above. I would point out that this is under current legislation and this can be subject to change.
For a short time until 5th April 2016 then you could indeed limbo under the Pension Lifetime Allowance charge bar of £1.25 million. I will write another blog about that.
It is all a question of timing, many will not get near the Pension Lifetime Allowance charge and the additional costs of a QROPS transfer would make the move pointless. Some may breach the Pension Lifetime Allowance charge limit in the long term future and should keep an eye on this and move when the benefits outweigh the costs and not before.
For those with final salary schemes, they risk entering the limbo dance blind if they do not take advice. The valuation of these schemes is not as straightforward as it seems.
Don’t hit the bar, take qualified advice about the Pension Lifetime Allowance charge.
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